Japanese candles. Market language. History of Japanese candles The structure of Japanese candles and their advantages
The most convenient and popular type of chart is, of course, “Japanese candlesticks” (types of Japanese candlesticks and models of Japanese candlesticks). They are so convenient that the vast majority of currency traders (as well as in stock and other markets) work with them. I strongly recommend that beginning traders work with this type of chart. In addition to ease of use, using Japanese candlesticks you can also carry out technical analysis of the chart, based on various combinations and patterns of Japanese candlesticks to identify certain signals to buy or sell. These combinations and figures, together with other indicators and signals (technical indicators, fundamental, psychological, etc.) will help you make the right decisions.
The Japanese candlesticks technical analysis method is based on various combinations and patterns of Japanese candlesticks.
Basic rules for analyzing Japanese candlesticks:
— To avoid contradictions, it is necessary to analyze only one period of data, for example, only daily candles;
— Before analyzing candles, it is necessary to identify the direction of the current trend;
— To confirm the figure, be sure to wait until the end of the candle.
Doji
Doji - a candle whose opening price coincides with the closing price - it has no or almost no body. Dojis show signs of indecision in the behavior of market participants, and, therefore, as a rule, signal an impending market reversal. Dojis are only important in markets where they do not occur very often: if a doji occurs too often on any chart, then it loses its significance.
THERE ARE THE FOLLOWING TYPES OF DOGE:
1. " Long-legged doji“—has long upper and lower shadows. The higher the upper shadow of the doji, the stronger its bearish potential.
2. “” - doji, which does not have a lower shadow, but has a long upper shadow, i.e. opening and closing prices correspond to the minimum for the period under review.
3. "" - the exact opposite of "Tombstone": this doji does not have an upper shadow, but has a long lower one. It is believed that the longer the Dragonfly's shadow, the more optimistic market participants are.
Candles with a small body are called “Spinning tops”. Spinning tops usually appear during periods of market consolidation and take on special significance in the context of the situation.
Marubozu
A Marubozu candle is a candle that has no (or very small) upper and lower shadows.
White candle indicates that the opening price coincides with the minimum, and the closing price coincides with the maximum for the analyzed period. This candle reflects the optimistic sentiment of investors.
U black candle The opening price coincides with the maximum, and the closing price coincides with the minimum. The appearance of this candle indicates the predominance of bearish sentiment in the market.
Basic Japanese candlestick patterns
The theory of Japanese candlesticks is based on the fact that the size and relative position of the candle body and shadows, as well as the relative position and color of neighboring candles, can signal continuation of movement, braking, or a trend reversal. Certain combinations of candles are called patterns.
Trend reversal patterns
A trend reversal signal indicates that there is a possibility of a trend reversal, but not necessarily the opposite. The following are some of the most common patterns that indicate the possibility of a reversal: Hammer and Hanged Man, Engulfing Pattern, Cloud Break, and Stars.
1. The Hammer and the Hanged Man
Description:
-The body is at the top of the price range. Body color is not given importance;
— The lower shadow is twice as long as the body;
— The candle does not have an upper shadow, and if it does, it is very short.
Strengthening factors:
-The longer the lower shadow, the shorter the upper and the larger the body, the greater the potential;
-Although body color does not matter, the bullish (white) color of the Hammer indicates greater bullish potential, and the bearish (black) color of the Hanged Man indicates greater bearish potential.
Peculiarities:
— In the case of the Hanging Man, confirmation of the bearish signal is important. The greater the downward price gap between the Hanged Man's body and the next period's opening price, the greater the likelihood that the Hanged Man will form a top. Another confirmation of the “bearish” nature can be a black candle, the closing price of which is lower than the closing price of the period when the “Hanging Man” appeared;
— “Hammer” is characterized by previous price dynamics. If a candle with a pronounced bearish sign appears in front of the Hammer (for example, with a long body without shadows), this is evidence that the bearish market is gaining strength, and then you need to wait for confirmation that the bulls are in control of the situation (for example, the next candle with a closing price higher than the Hammer closing price). At the same time, it is necessary to monitor whether the “Hammer” has broken through an important support level.
Description:
— There should be a clearly visible trend in the market, even a short-term one;
— The pattern is formed by two candles. The second body of the candle must absorb the first, and the shadows are not taken into account;
— The body of the second candle should be contrasting in color. The only exception is when the body of the candle is so small that it is comparable to a doji or is a doji (for example, the engulfing of a candle with a small white body by a candle with a very large white body in a downward trend, or the engulfing of a candle with a small black body by a candle with a very large black body in uptrend.
Strengthening factors:
The first candle has a very small body, and the second one has a very large body;
-The appearance of an absorption pattern after a protracted or very rapid trend;
-The second candle corresponds to a larger trading volume;
-The second candle absorbs several candle bodies.
The pattern is a sequence of a black candle and a candle that opens well below the low of the previous candle. The body of the second candle must cover more than half of the body of the first.
The exception is three models of continuation of the “bearish” trend, when the second “bullish” candle covers the body of the first by less than half:
If these patterns are present on the chart and prices then fall below the low of the white candle, the downtrend will continue.
A star is a candle with a small body of any color that forms a price gap with the previous candle with a large body. The gap between the bodies of the candles is the main condition for the formation of a “Star”, while shadows are not taken into account.
The “Star” model has four modifications:
-Doji Star
4.1 MORNING STAR
Morning Star is a bottom reversal pattern.
The pattern consists of a candle with a long black body, followed by a candle with a small body with a gap downwards. The ideal model assumes that there is a price gap before and after the body of the middle candle.
4.2 EVENING STAR
The evening star is the bearish counterpart of the morning star. The evening star is especially significant at the end of an upward trend, but can also occur when it appears at the top of the trading corridor (resistance level).
Strengthening factors for morning and evening stars:
The presence of gaps between the bodies of stars and two neighboring candles;
The body of the third candle overlaps a significant part of the body of the first candle;
Small trading volume during the formation of the first candle and high volume during the formation of the third candle.
4.3 EVENING AND MORNING STARS OF DOJI
A doji star is a more important candlestick pattern than just a star because it contains a doji. But if a doji is followed by a white candle in an uptrend or a black candle in a downtrend that forms a price gap (up in an uptrend or down in a downtrend), the doji is no longer a bearish or bullish signal. The strongest signal is the “Abandoned Baby”, which is characterized by a price gap between the doji star and neighboring candles, and not even the shadows intersect.
4.4 FALLING STAR
The body of the shooting star is small and located at the bottom of the price range of the candle, and the upper shadow is long. Like other stars, the body color of a shooting star does not matter. This model warns of a possible end to the price rise. Unlike the evening star, it is not one of the most important signals. The body of an ideal shooting star will form a break with the body of the previous candle, but not necessarily.
An inverted hammer is similar to a shooting star, but it requires confirming bullish signals. For example, the next opening price is above the body of the Inverted Hammer or the appearance of a white candlestick with a higher price level.
Combinations of Japanese candles
— Japanese candlestick combination Penetrating Candle: consists of two candles in a bearish trend. The first black candle continues the downward trend, and the second is white. The white candle opens lower than the low of the black candle and closes above the midpoint of the black candle. The greater the “penetration” of the white candle into the body of the black one, the more likely it is that a reversal will occur.
— Japanese candlestick combination Bullish engulfing And Bearish engulfing a very common and reliable figure. The body of the next candle is larger than the body of the previous one. All engulfing patterns must necessarily open lower (/higher) than the closing price of the first candlestick, and close higher (/lower) than the opening price of the first candlestick. The larger the body of the engulfing candle, the stronger the signal. If the signal contradicts the current trend, then be careful.
— Combination of Japanese candlesticks Figure: the pattern consists of a small body, the length of which is within the body of the previous candle. The body of a small candle should be 3 times smaller than the body of a large candle. Harami can be doji. Harami can be double, this strengthens the reversal signal.
— Japanese candlestick combination Line of bullish counter-attack is the result of two candlesticks, where the closing level They follow from two candlesticks, the closing of the first will correspond to the closing price of the second. This occurs after the second candle opens with a large gap down (up), and by the close it returns to the closing price of the previous price. This is a Japanese candlestick reversal pattern, giving a buy signal. The signal is not very reliable, it is better to get confirmation from the next figure.
— Japanese candlestick combination Tops and bottoms. Tweezers (Tweezers Tops and Bottoms) the figure is relatively similar to a “veil of dark clouds”. This configuration can appear in a variety of ways, with or without shadows, with a hangman figure and a doji (a type of Japanese candlestick) that will be in the Harami position, with engulfing, and so on. Typically, tweezers are not strong signals of a trend change. However, the value of this signal increases if they are formed after a long trend.
Trend continuation models
Represents the price gap between extreme price values of the current and previous periods. You should play in the direction indicated by the window, since windows become areas of support and resistance. In an upward trend, the window is a signal of a further rise in price. In corrective downturns, such a window should provide support to prices. If the window closes as a result of a corrective decline, the previous uptrend should be considered over. Japanese analysts believe that if the window has not closed within three periods, then the trend preceding the corrective decline or rise will continue.
It is important to note a price breakout window to the upside - especially if it opens with a small black candle from an area of stagnation located at a low price level.
Basic provisions regarding windows:
— During the correction, prices return to the window;
— After three windows up or three windows down, a top (if three windows open with an uptrend) or a bottom (if three windows open with a downtrend) is very likely to appear. This probability increases if any candle or reversal pattern appears after the third window (for example, a doji, or a "break in the clouds");
— If after eight or ten new highs or lows there is no significant correction, the likelihood of such a correction in the near future increases.
BREAKING SHAWL UP OR DOWN
This is a trend continuation pattern, which is marked by the appearance of a black candlestick in an uptrend after a white candlestick creating a price gap upward. The opening price of the black candle is within the body of the white candle, and the closing price is below it. The closing price of the black candle is the buy point. If the window closes and selling pressure continues, the Shuffle Up Gap signal is not valid. The bodies of the two candles that make up this pattern should be approximately the same in size.
The opposite is true for the Down Shuffle Break pattern:
Both models are very rare.
PLAYING ON THE GAP FROM PRICE HIGH AND MINIMUM
After a sharp increase in price for one or two trading sessions, the market may pause for a while, and then consolidation begins, resulting in the formation of a group of candles with small bodies, which indicates that the market is indecisive. The opening price then forms a price gap upward. This model is called “Playing on the gap from price highs.” Its name comes from the fact that prices fluctuate near a recent high and then gap upward.
PLAYING AT THE GAP FROM PRICE MINIMUM
This pattern is the bearish counterpart of the pattern mentioned above.
SEPARATION OF ADJACENT WHITE CANDLES
This pattern is observed when, during an uptrend, a white candlestick appears, forming a gap upward, and is followed by another white candlestick of approximately the same size and almost the same opening price.
The model is very rare, and even less common is the model “Tearing down white adjacent candles.”
“Candlestick break down” is also a trend continuation pattern: if it occurs, prices will continue to fall. It is extremely rare, since more often the downward price gap is formed by black candles, and if after the black candle that formed the window, another black candle appears with a lower closing price, this means that the downward trend in prices will continue.
2 Model Three methods
There are two variants of this pattern: “bullish” and “bearish”.
A bullish pattern is characterized by a long white candlestick appearing first, followed by a group of falling candlesticks with small bodies (ideally there should be three such candlesticks, but there could be two or more than three). The main condition is that these candles do not go beyond the price range of the white candle. Small candles can be any color, but are usually black. At the end, a long white candle is formed with a closing price higher than the closing price of the first period. The opening price of this candle must also be higher than the closing price of the previous candle.
The “bearish” model “Three methods” is an analogue of the “bullish” model, but is observed during a downward trend.
3 Model Three advancing white soldiers
The pattern represents a group of three white candles with successively higher closing prices.
— If the Three White Soldiers appear in the area of low prices after a period of stabilization, this is a sign of the strength of the bull market. The opening price of each white candle in such a pattern is within or close to the body of the previous candle. The closing prices of the candles are equal to the maximum prices or approach them (Fig. a).
— If the second and third candle (or only the third candle) show signs of weakening, then the “Repulsed Offensive” pattern is formed (Fig. b). This pattern is especially alarming if it appears after a long upward trend. A sign of a weakening market can be both the decreasing bodies of the candles and the relatively long upper shadows of the last two candles.
— If the second candle has a long white body and registers a new high, and is followed by a small white candle, then a “Braking” pattern is formed (Fig. c). The last small candle can either form a gap in relation to the long white body (becomes a “Star”), or “sits on its shoulder” (that is, is at the top of the previous long body). When this pattern appears, it is recommended to close long positions.
Although Repulse and Brake patterns are not typically top reversal patterns, significant price declines are sometimes seen after they occur. These two models are of great importance in the area of high prices.
4. Model Separation
This pattern consists of two contrasting candles with the same opening price. The model is an indicator of trend continuation. In an uptrend, the first candle is black, followed by a white candle with the same opening price (bullish pattern). In a downward trend, a white candlestick appears first, followed by a black one with the same opening price as the white candlestick (“bearish” pattern).
Warning: Never trade based solely on combinations and patterns of Japanese candlesticks. The FOREX market is too volatile (changeable). Therefore, it is necessary to confirm signals with other technical indicators.
Conclusion:
Japanese candles (types of Japanese candles, models of Japanese candles) are indispensable aids for decision making and give good signals to the trader. Learn to use them correctly at work.
The model is an abandoned baby. This Japanese pattern appears rarely, in a top or bottom reversal. It is considered a very strong reversal pattern consisting of a doji star separated by spaces from the previous and subsequent candle. At the bottom of a downward trend, following the black candle, there is a small white candle with a closing price, usually above the bottom of the black candle. After breaking through the minimum level of a predominantly white candle, the price decline will usually continue.
Evening Star. An important figure that determines reversals at the top. Formed from three candlesticks. The first is a tall white candle. The second is with a short black (possibly white) body, creating a gap upwards. The third, black candle covers approximately half of the first, white candle.
Japanese formation, 2 crows flying up. It consists of three candles. The first is an elongated white candle, followed by a small black one at short intervals. The third candle, the black body, closes slightly below the closing price of the 2nd candle. This formation signals a trend reversal at the top.
Doji. The Japanese Doji is characterized by the same opening and closing prices. Separate several Japanese Doji candles (see picture). They give very strong signals.
A curtain of clouds. This Japanese pattern foreshadows a bearish reversal. With an upward trend, a large white candle is followed by a black candle, its opening price is higher than that of the previous candle, and its closing price is in the area of the middle of the body of the first candle.
Belt grab. This Japanese pattern appears on charts in two forms: bearish and bullish. A bullish formation consisting of a large white candle, its opening price is near the minimum. It usually gives when it is formed in a low price zone.
A bearish formation consists of a large black candlestick, whose opening price itself is in the area of the maximum and signals a bearish market movement if it is formed in the high price area.
Stars. A short body that forms a gap relative to the previous large body. It confirms the weakening of the previous trend. The star that forms immediately behind the elongated black candle, during , is called by the Japanese “raindrop.”
Doji stars. Doji forming a gap from a large white and black candle. This is an important Japanese reversal pattern when confirmed by another signal in the passage of the second session.
Counterattack. Following a black candle during a downward trend or a white candle during an uptrend, the market usually opens with a large interval downwards (in the second case up), and then by the time it closes it returns to the border of the price that closed the previous session. This Japanese formation speaks of equal forces in the confrontation between the bulls and bears themselves.
Japanese crossharami, whose reversal zone begins with a doji. It signals a reversal at the bottom or at the peak of the rise, especially if it is followed by a large white (in the second case, black) candle.
Hammer. Japanese pattern giving a significant reversal signal. A short black candle (or white) located at the bottom of the entire price range, with a large lower shadow. Its upper shadow is usually short, and sometimes it is not there at all. The appearance of this candle in a downtrend indicates an increase in prices.
Window. The windows indicate a continuation of the current trend. When a window appears on the chart during an uptrend, a pullback to the same gap is likely to occur. This could even become a support level for the price. At the time when the window opens in the process of falling prices, there is usually a rise to the window. In this case, window . The Japanese usually say: - the market is returning to the window.
The Japanese model is the “three rivers” foundation. As a rule, it includes three candles. The first has a large body and is black. The second, a small black candle, defining . The third, at the base with a short body.
The attack repulsed. Similar to the Japanese “3 white soldiers” formation, the last 2 white candles here give a signal of a weakening of the uptrend. This combination indicates a weakening of the power of buyers or an increase in the influence of sellers.
Japanese shooting star model an upper candle with a large wick on top and a small wick below (sometimes without it at all), a small body near the lows, which appears after the trend has risen. Signals a bearish position in an uptrend.
Inverted hammer. A candle formed following a downward trend, with a high upper shadow and a rather small body, which is located below the price. The shadow below is usually short (sometimes there is none). The shape of an inverted hammer is similar to a bearish shooting star, but when it appears in a downtrend, it is analyzed as a bullish bottom turn breakout. Such a signal must be confirmed during the next session, with a white candle with opening (or closing) prices higher than the previous one.
Tweezers. This Japanese formation gives an average signal of a trend change. It is of great importance if two candles included in its composition also form a candlestick indicator again. For example, if in both sessions the harami cross formation contains an equal high, this may be an important signal at the peak, since 2 of the same candles form the upper part of the “tweezers” and the bearish “harami cross” formation.
Japanese hanged man (or hanged man). Significant reversal signal at the top. The Hanged Man and the Hammer are practically the same candle. It is characterized by a short body (white or black), usually located at the highest part of the price range of the current session, and a fairly long shadow below. The upper shadow is usually short (sometimes completely absent).
When such a candle is formed during an uptrend, it is considered a bearish hanging man and indicates that the market has begun to weaken, but requires bearish evidence in the second session, for example, a black candle with a price slightly below the open or close. As a rule, the lower wick of this candle should be at least 2...3 times the height of the body.
Clearance in the clouds. Japanese reversal formation at the bottom. During a downtrend, a large black candle is formed at the beginning of the second session. It all ends with the appearance of a large white candle, with the closing price just above the center of the previous candle.
Separation. This type of Japanese pattern appears during a downward or upward trend, while the market forms around the opening price level of the previous candle, and then closes below or above it. Once this pattern has formed, the previous trend usually resumes.
Breaking the tasuki. Such a gap can happen both downward and upward. A downward gap is formed when, during a trend tending to the bottom, a downward gap is made by a black candlestick. Following it is a white candle, similar in size, with the opening price at the limit of the black candle, but with the closing price, a level higher. Which is bearish.
“Tasuki gap” - up, considered a bullish pattern in the continuation of the trend. In this case, after the white candlestick, which breaks upward, a black candlestick similar in size grows, with the opening price at the limit of the white body and the closing price itself slightly below it. The Japanese “tasuki gap” formation appears on charts quite rarely.
Push. Japanese formation, in which a white candlestick with a closing price is within the previous black body, but lower than its middle. The Japanese "push" pattern is larger than the "bottom" pattern, but gives a stronger signal than the "cloud break". In a downtrend, the “push” will be bearish. But in a rising market, this Japanese model will be bullish.
3 white soldiers. A formation of 3 white candles, with gradually increasing closing prices. These candles indicate market strengthening when they are formed after a moment of stabilization and in the area of low prices.
Formation - three Buddhas. The Japanese model of three Buddhas is similar to the famous “head and shoulders” graphic formation. According to the Japanese definition, this is one of the types: “three mountains”, in which the peak located in the center should be higher than the side ones. The “three Buddhas” formation is essentially “head and shoulders”.
Three mountains. Japanese reversal formation at the top, where the price forms 3 peaks similar to each other. It happens that this type of formation is considered as 3 gradually.
Three rivers. 3 depressions are formed. When prices exceed the intermediate highs with a white candlestick or gap, this signals that the market has reached bottoms. At the bottom, during a downward trend, behind the black candlesticks, there is a small white candlestick, its closing price is near the lows of the black candlestick.
This type of Japanese formation is considered a trend continuation formation. After the line of lows of the white candlestick breaks through, the price decline will continue.
Holding on the tatami. A strictly bullish formation, foreshadowing the continuation of the trend. Following the white gap candle is a short black candle. Next, it is followed by 2 short black candles, and after them - a powerful white candle, or a candle whose opening price forms a gap upward relative to the outer black candle.
Morning Star. An important Japanese reversal formation at the bottom, which includes three candles. The first candle has a long black body. The second has a short one (white or black), forming a space downwards. The third, white candle covers most of the 1st, black candle.
Formation - Morning Star "Doji". The Japanese model, which has many similarities with the morning star, only the candle in the center (star part), is represented here as a doji. Due to the presence of the doji, this formation is more bullish than the standard morning star.
Harami. A Japanese formation consisting of 2 candles, where the short body lies within the long body of the candle following it. Harami portends that the previous trend has ended, and there has been pacification in the struggle between bulls and bears. The color of the 2nd candle can be either white or black. In most cases, it is the opposite color of the first candle.
Remembering all types of ideal Japanese candles is difficult, but possible. When speculating on the market for a long time, you can easily recognize a particular situation that has arisen on a chart of Japanese candlesticks. But today, when you are just starting your journey as a trader, review the above illustrations again, and if you find something already familiar on the charts in a real trend, look at this situation again and you will find out what “the candles want to tell you.”
VIDEO: Candlestick patterns
Candlestick analysis involves identifying certain patterns that help predict future fluctuations in the market. Conventionally, all such models can be divided into reversal and trend continuing. They are very popular among traders due to the fact that they have fairly high signal accuracy. Next we will look at all the main Japanese candlestick combinations.
The body of the candlestick is a white (green) or black (red) rectangle, limited by the opening and closing prices. The vertical lines above and below are called top and bottom “shadows”.
- If a rectangle white, which means the stock closed above its opening price.
- If black– then the closing price is lower than the opening price.
Taking just one look at the white or black body of the candle, you instantly understand whether stock trading was closed on a positive or negative wave. Those of us who spend hours looking at charts eventually realize that Japanese candlesticks are not only easy on the eyes, but also provide clear signals that are often not so noticeable on bar charts.
Important combinations of Japanese candlesticks that, if interpreted correctly, will lead to profitable trades.
The Doji is an example of a single candlestick combination. This type of candle, where a stock opens and closes at the same price, is called a " doji».
By the way, the plural of “doji” is also “doji”.
In the case of a doji, the candle has no body. Since buyers are unable to put enough pressure on sellers to force the stock to close above the opening price, and sellers are unable to force the stock to move below the opening price, this candle reflects the state of indecision that prevails in the minds of market participants. 
Please remember the doji. This is a very important candle because it very often predicts changes in the current trend or even a reversal.
- Traditionally " doji» open and close at the same price. But even if it is an “almost doji”, where the opening and closing prices differ by a few tenths of a point, the candle still carries an important signal.
- ", which appears during a sideways movement (consolidation) in combination with another doji and candles with a short body, does not indicate serious changes. To give a strong reversal signal, such a candle must appear at the top or bottom of a chart price pattern.
- " is considered a stronger signal at the top of an uptrend in stock prices or index values than at the bottom of a downtrend. This is especially true when it is preceded by a long white candle, as in the evening star-doji combination. Remember: a long white candle indicates strong bullish sentiment. Then the “doji” appears, which indicates market participants’ indecisiveness and unwillingness to pay a higher price. What is the result? Perhaps a rollback and profit taking will soon follow.
- ”, many times confirming the top or bottom of the trend, turn into areas of support and resistance.
When a stock or other asset pulls back to support during an uptrend and then forms a doji, it indicates it is ready to reverse and continue its rise. The same is true in a downtrend: if a stock bounces to a resistance level and then forms a doji, it may indicate that it will continue to fall. Notice the important word “may.” Always wait for the next candle to confirm the direction of price movement.
At the candle " long-legged doji" has long upper and lower shadows, and its appearance will certainly attract your attention. When the opening and closing prices are in the middle of a "doji", it is called a "doji". rickshaw».
If you think about what had to happen for these candles to form, you will understand why their appearance is so significant. Imagine that a stock opened at a certain price, say $50. Buying pressure pushed them high, then selling pressure pushed them much lower. And yet, the session closed at the opening price, i.e., $50. Conclusion? Total uncertainty. Neither bulls nor bears have enough power to push prices higher or lower than the opening price. Do you understand that this may make the bulls want to take profits in the next trading session just in case? Remember, the market does not like uncertainty.
When you see a " doji-gravestone", and you have a long position open on these shares, immediately take part of the profit. Well, or at least tighten the stop loss.
In his book Japanese Candlesticks: Graphical Analysis of Financial Markets, Steve Nison writes: “We have already discussed that many Japanese terms associated with technical analysis are based on military analogies, and in this context, the “tombstone doji” also brings to mind graves. bulls or bears who died defending their territory.”
« Tombstone Doji» opens and closes at the minimum price of the day. If prices rise to a new high, drawing a long upper shadow, this should put bulls in a particularly pessimistic mood. The translation is this: no matter that the bulls took out the entire supply, the bears still pushed prices back to the minimum and the auction closed at that price. Remember that the mark at which it ended is itself a very important signal.
Hammer and Hanged Man
The Hammer and Hanged Man candles are reversal combinations. It appears at important support levels and indicates that the downward movement is coming to an end. The hammer is also known to many traders as Pin bar.
- The body of the candle in this case can be white or black, but must be short. The lower shadow is twice as long as the body. The upper shadow, as a rule, is either very short or absent altogether: such a candle is said to have a “cut top.”
When you see the combination " hammer" during a downtrend, this may mean that the trend will slow down and change direction, going sideways or changing to an uptrend. But remember: the “hammer” needs confirmation. Whether it represents a true reversal signal will become clear from the following combination of candles.
The hammer can be either a bullish or bearish candle - Hanged. If a hanging man appears during an uptrend, the implication is immediately clear. However, you will have to wait for the next candle to form before interpreting this signal. When/if the next candle confirms the hanging man is right, take all or part of the profit as the price will probably go down.
Why is the hammer a reversal pattern? Professional traders who are well familiar with candlestick analysis and market psychology explain this by saying that sellers made an attempt to significantly lower the price (this is evidenced by a long downward shadow). However, buyers were able to turn the tide. Therefore, a small body is formed at the end of the hammer.
Both regular and inverted combinations of Japanese candlesticks can appear on the chart. This form also forms at the support level and indicates an upward reversal of the market. The inverted hammer is characterized by a large shadow on top and a small body below.
Absorption
Combination of Japanese candles Absorption consists of two candles, which must be of different colors. The body of the second candle should completely " Absorb"The body is the first. The opening price of the second candle should be lower than the closing price of the first, and the closing price of the second should be higher than the closing price of the first. This combination is called " bullish engulfing" Its opposite is “ bearish engulfing».
When looking for such a signal on the chart, it is important to remember one rule - it is the bodies of the candles that should be absorbed. That is, the body of the left candle should be within the body of the right one.
One of the significant advantages of this model is that it appears on the chart quite often. Indeed, if you look at the quotes of most financial instruments, you can often find this combination at support and resistance levels.
It is better to look for such a pattern at such levels. To do this, you can use numerous indicators like. Or you can simply draw a chart correctly and manually determine all the important levels.
What is the reason for the appearance of such a pattern? Let's say the price of a stock rises. One day the price suddenly opens with a gap and then begins to decline. Market sentiment changes and the candle closes below the previous bullish opening. In this case, we are talking about bearish engulfing.
When an engulfing pattern appears, you must wait for confirmation. The confirmation is the closing of the second candle. Once it has happened and the pattern has finally formed, you can open a trade in the direction in which the pattern points. Naturally, it would not be superfluous to use any indicators.
Stars
The following combinations consist of three candles, including the Stars. " Star" represents a strong and valuable reversal signal.
To be considered a Star, a candle must appear at the top (bottom) of an uptrend (downtrend), have a short body, and open with a gap (up in the case of an uptrend, down in the case of a downtrend) compared to the previous candle.
Candles adjacent to the “star”: in the case of an uptrend, the body of the first candle should be long and white, and the body of the third should be long and black, matching in size with the body of the first. In the case of a downtrend, the body of the first candle is long and black, then a “star” appears. And finally, a third long white candle appears, the size of the first, black one.
The Japanese call the first combination the “Evening Star” and the second the “Morning Star”. When the Star turns into a Doji, it represents an even more serious warning of an upcoming reversal.
Morning Star is a reversal pattern. This pattern is somewhat more complex than the hammer or shooting star, as it is formed by three candles. The morning star appears at support levels and indicates that the market is turning upward.
What are the main parameters of such a model? First of all, the morning star is preceded by a bearish candle. Then a so-called gap in quotes appears and a small candle with a small body and a small shadow. After it, a bullish candle usually appears with a gap.
It is important to note that if the small candle is a Doji, it will be called a Morning Star Doji. However, this does not affect the essence of the model, since in both cases we are talking about a market reversal.
What is the explanation for this pattern? Everything is quite simple. The first candle indicates that the bears are trying to gain dominance in the market. The second candle with a gap seems to indicate that the bears have chances. However, this candle really breaks the price.
The “star” itself is small and it is clear that there is a struggle in the market. Then the bears release the price and buyers begin to dominate. Moreover, as can be seen from the pattern, there is a completely opposite dynamics and rate of price growth. And this already suggests that the bears suffered a crushing defeat.
Unfortunately, the Morning Star pattern is not a very frequent visitor to the chart. Much more often, a price reversal occurs with the appearance of a hammer or an inverted hammer. But if the morning star is formed, then the market will actually turn around.
The Evening Star pattern is a mirror image of the Morning Star. He predicts a market reversal downwards. This model includes three candles. The first is bullish, the second is doji and the third is bearish.
A prerequisite for the formation of this pattern are the so-called between candles. There is a mandatory price gap between the bullish and doji. The same goes for the doji and bearish candle.
How is this pattern formed? Everything is quite simple. First, a bullish candle appears, which indicates buyer interest. In principle, this is also indicated by the price gap between the first and second candles. Investors are increasingly inclined to buy. But in the process of forming the second candle, a struggle occurs, a very small doji candle appears.
Then the sellers completely take the initiative into their own hands, another price gap appears and a downward trend begins, and quite a strong one at that. It is important to remember that the third candle should close below the center of the first. Otherwise the signal will be weak.
Another important point regarding this pattern. It only works when price gaps appear. If they are not there, we are not talking about the evening star. Although in this case, a reversal often occurs. But it has nothing to do with this pattern.
Like many other Japanese candlestick patterns, the evening star forms at a resistance level. Moreover, often the second candle turns out to be above the resistance due to the price gap, and then the price again turns out to be lower due to the second price gap.
The shooting star pattern is a reversal pattern. It appears at a resistance level and indicates that the uptrend is coming to an end. A shooting star can be either a bullish or bearish candle. It doesn't matter at all. The signal it gives is a reversal from top to bottom.
On the chart, a shooting star looks like this - it has a small body and a very long upward shadow.
It is quite easy to identify such a pattern on a chart. It is necessary to preliminarily designate the levels, and if a model with a very long upper shadow and a small body appears near the resistance, then we are dealing with a shooting star. By the way, it is important to note that the lower shadow of a shooting star is either absent or very short.
How can such a phenomenon be explained? The fact is that buyers are trying to break through the resistance and raise the price even higher. If they succeed, the shooting star will not form. But if buyers fail, a pattern appears with a very long shadow and a short body. Sellers are gradually taking the initiative into their own hands.
Do not confuse the shooting star pattern with the inverted hammer pattern. The latter forms at support and indicates an upward reversal of the market.
A curtain of dark clouds and a gap in the clouds
Another important combination indicating a possible trend reversal is “ curtain of dark clouds" A fairly strong candlestick analysis model, which indicates the end of an uptrend and the beginning of a downtrend. It is formed at the resistance level. It also consists of two candles and heralds change when it appears at the top of an uptrend or at the end of a stagnation (sideways movement).
The first candle has a long white body. The second body opens above the close of the first and closes near the lower boundary of the price range of this and the previous candle.
The deeper the closing price of the second candle falls relative to the price range of the first, the stronger the bearish signal of this combination.
The "dark cloud cover" warning is in its name: a storm is approaching, hide under the roof.
The opposite of " curtains of dark clouds" is a bullish "clearance in the clouds" combination. It resembles a "bullish engulfing" in which the second candle (the body) opens below the closing price of the previous black candle and then rises to at least half of its body. The more strongly the second body “pierces” the first, the higher the chances that this is a strong signal of a trend reversal. When such a combination occurs at the bottom of a downtrend, expect a change in the direction of its movement.
Working with the Dark Veil pattern is quite simple. You need to wait until the formation of the Japanese candlestick combination is completed and after that you can sell. It is very important that the pattern appears at a resistance level or at a key resistance level, which will significantly increase the strength of the signal.
Also, you can use various technical analysis indicators in order to get confirmation of the signal.
Harami and Harami Cross
The Harami combination is another interesting opportunity for a financial market trader to find a market reversal and open a trade on the opposite trend at its very beginning. This pattern is based on two candles, one of which is larger than the other in size.
"Harami" means " pregnant" This combination consists of a long body enclosing a subsequent short one. A long candle is " mother", short - " child».
In this combination, the long body should appear first and the short body second. (When the opposite occurs, it means a bullish engulfing combination.) The colors of the candles do not have to be opposite, but they usually are.
The appearance of a harami means that the current trend has come to an end and there will be a reversal in the market in the opposite direction. Moreover, it is important to understand that color combinations in this case are of low importance. What is more important is what the previous trend was in order to understand what to expect from the market in the future. A bearish harami appears at a resistance level, while a bullish harami appears at a support level.
The distinctive feature of Harami is that this model assumes a price gap. If you look closely at the figure, you can see that the body of the right candle is inside the body of the left candle. The opening of the right candle occurs either below or above the close
left depending on the situation. It is very important to pay attention to the size of the right candle. The smaller it is, the greater the chances that a truly harami pattern has formed. Moreover, if a doji appears in place of the right candle, the signal becomes even stronger.
" is formed when the second candle ("child") represents a "doji". This means that the strong confidence of market participants has disappeared - a bullish mood in the case of a long white body of the first candle, or a bearish mood when the first candle is long and black. As already stated, " doji" means indecision and uncertainty. In other words, a harami cross could be a potential reversal signal. Pay attention to this candle when you notice it during an uptrend or downtrend.
- When we are dealing with a regular harami, the right candle has a body, albeit not a large one. In the case of the Harami Cross combination, the right candle has no body. A Doji candle is forming. This candlestick combination often creates fear in the markets as the second candlestick shows a lack of volatility, indicating uncertainty in the market. The signal will accordingly be stronger.
The sandwich combination of Japanese candlesticks is quite rare and difficult to find on the chart; it consists of three candles. However, when it appears, we can say that there will soon be a trend. The model fully corresponds to its name and represents “ sandwich"on the chart.
Contrary to popular belief, a sandwich can be either a bearish or a bullish candlestick pattern. That is, it can appear after a downward trend and foreshadow growth, or it can form after an uptrend and foreshadow a future decline.
If we are talking about a bullish sandwich, the two outer candles will definitely be bearish, and the middle one will be bullish. Moreover, the middle candle should be smaller than the outer ones. As for the bearish sandwich, the opposite is true - the two outer candles should be bullish, and the middle one should be bearish.
This Japanese candlestick pattern is in many ways similar to models such as the morning and evening star. Very often they are even confused with each other. The name speaks for itself - it is a lonely candle (doji), which is formed with a price gap in relation to the previous candle and the next one.
- The composition includes three candles. The signal is the average. However, until the pattern is fully formed, it is not recommended to trade it. The middle candle must be a doji.
The first candle can be either bearish (if the previous trend was bearish) or bullish (if the market was in an uptrend). Then comes the doji and after that again a bearish or bullish candle (necessarily opposite to the first). That is, if the first was bearish, then the third will definitely be bullish and vice versa, if the first was bullish, then the third will be bearish.
After completing the formation of the combination, you can open a deal depending on which model appears. Although some experts recommend waiting a few more candles, you should not do this, as you may miss a good opportunity to enter the market. On the other hand, in order to be more confident in the decision being made, it is recommended to use additional indicators. It is important to remember that this pattern only indicates a reversal when it forms at levels.
The combination of Japanese candlesticks does not appear on the chart very often. But it is quite reliable, as practice shows. Belt grabs can be of two types: bullish and bearish. A bullish belt grab is formed with the appearance of a candle, the opening of which occurs at the minimum for a certain period with a price gap in relation to the previous candle. After this pattern appears, an upward movement usually begins. An important feature of the bullish belt grab is that the candle has no lower shadow, that is, sellers do not even try to change the situation in their favor.
As for the Bearish Belt Grip, it is formed by a bearish candle that opens at the high of a certain period of time with a price gap from the previous candle. A bearish belt grab signals the start of a downtrend. In order to understand whether this is really a bearish belt grab, you need to make sure that the signal candle does not have an upper shadow. Buyers don’t even try to challenge the sellers’ initiative.
Three black crows are a pattern that indicates a possible market reversal after an uptrend. An important feature of this pattern is that the closing prices decrease sequentially, and the opening prices are within the limits of the previous candle.
Two flying crows are a rather interesting pattern, which is very similar visually to engulfing, with the only difference being that both candles must be bearish. The pattern is a signal for a future downward trend. Its meaning is that despite the upward price gap, buyers cannot hold the price and push it higher. As a result, the decline begins.
As for holding on the mat, this pattern is one that continues the trend. In principle, purely visually, it can resemble a graphical pattern of a flag or a pennant, so a trader is unlikely to have doubts about which position to choose when such a pattern appears on the chart.
Results
No candlestick combination, indicator, oscillator or analyst forecast will tell you where your stock - or the market as a whole - will move in the next hours, days, weeks or months. What can What these forecasting tools do is tell us about the possibility and degree of likelihood of price movements in one direction or another, based on historical data.
If you find an error, please highlight a piece of text and click Ctrl+Enter.
Forex provides many opportunities and approaches to make successful transactions and increase trading profitability. What strategy to use and what approach to choose depends on the trader, but what he cannot do without is graphs that reflect the relationship between supply and demand for a particular currency.
This information can be presented in various ways:
- line graphs;
- using histograms;
- through smooth lines.
However, only one of the methods has features that the others do not have - charts using Japanese candlesticks. The once exotic and unusual Japanese candlesticks began to be used everywhere, since they clearly and intelligibly show the state of the market and the changes that have occurred over a certain period of time. Candlestick analysis allows you to predict market behavior with a high degree of probability and close many transactions with a profit.
What is a Japanese candle?
A currency pair chart using Japanese candlesticks looks like this:
You can select the presentation of charts using Japanese candlesticks on the Forex trading platform Metatrader 4 by clicking on the corresponding button.
A Japanese candle is a rectangle, similar to a regular candle, with “wicks” at both ends. Each candlestick is painted in a specific color, showing which trend prevailed over the selected period of time.
The size of the candle shows the amount of change in the price of the currency pair, and the “wicks” indicate the maximum. values of changes that occurred in a given time interval.
It was the simultaneous display of these parameters that became the reason for the popularity of using charts with Japanese candlesticks. Line charts and charts using bars do not have such information content.
The Japanese candlestick is characterized by 5 parameters:
- Opening price – Open;
- Closing price – Close;
- Lowest price during formation Low;
- Highest price during formation(candle life time) – High;
- Candle color– shows the prevailing trends in price changes for the time frame.
The size of the candle body shows:
- changes in the market;
- the prevailing trends are bullish or bearish (this is determined by the color of the candle).
The size of the shadows indicates price fluctuations:
- large shadow – a period of time when sales/purchases prevailed and were then compensated by an increase in purchases/sales;
- small shadow - the price fluctuated within minimal limits and one of the trends prevailed - growth or decline
Basic combinations of Japanese candlesticks
How to find her?
- small body;
- one of the shadows is several times larger than the body;
- the opposite shadow is small or absent;
- formed on a downward trend;
- a large spread of price maximum and minimum relative to other candles.
The hammer is characterized as a figure that shows that a given instrument is “oversold” and foreshadows an imminent trend change.
The Inverted Hammer candle has the same characteristics.
2. Candle "The Hanged Man"
The main difference between a candle "Hanged" from "Hammer" is the previous trend. In this case it is ascending. The signs of a technical analysis pattern are similar to the Hammer.
3. Shooting Star
This candle is identified by its long upper shadow and small body size. Signals about a possible price drop.
Candle characteristics:
- Before the formation of the candle there was a clear increase, at least several candles;
- Short body;
- Large top shadow;
- Absence of the lower shadow, or its small size;
How does this combination and Inverted Hammer compare?
These candles are similar, but have different meanings, and the important factor is type of candle – is it bearish or bullish.
4. Doji candles
A characteristic feature of these candles is a small body, indicating that since the start of the time frame the price has fluctuated slightly or sellers/buyers were able to compensate for the attack of buyers/sellers.
About strategies using Japanese candlesticks
Strategies based on chart analysis using Japanese candlesticks are easy to understand and apply: on the charts you find specific candlestick combinations that are used as signals of upcoming market behavior - whether the existing trend will continue or a reversal will occur in the near future. In this case, you do not need to make additional complex constructions and calculations.
Since there are many candlestick combinations, you can use a candlestick to find them Candles Indicator. It shows on charts the occurrence of certain combinations, but the decision to enter or exit the market is made by you.
When using Japanese candlestick strategies, keep the following points in mind:
- signal reliability – when a candlestick combination appears, look for confirmation, for example, on a trend indicator;
- signal is limited in time – limit transactions to 4 – 5 hours;
- using a large number of candlestick combinations when building a strategy;
- use of contrasting colors in the terminal for candles of different trends.
Rules for entering the market
Having discovered a certain combination, wait for a new candle to form, which will confirm the change in trend, and then enter the market. In addition, other methods of technical analysis serve as confirmation of the strength of the combination. For example, if a specific candlestick combination has formed, and the trend has changed, and a breakdown of the Forex price channel (resistance or support lines) has occurred, then these events reinforce each other, giving a reliable signal to enter the market.
Strategies based on Japanese candlestick analysis
1. Strategy “50% of the previous candle”
The strategy uses an hourly timeframe and instruments with high volatility of Forex currency pairs, for example, GBP\JPY. The strategy operates in conjunction with Stochastic with standard settings and the RSI indicator with a period of 7 and standard levels.
The first step is to find the price breakout point using the stochastic and RSI indicator:
- For an uptrend - overbought zones (from 75% for stochastic and more than 70% for RSI);
- For a downward trend – oversold zones.
The second step is to analyze the candles in search of the “Absorption” combination - the new candle is half or more larger than the previous one.
!If these conditions match, we open a deal.
You don’t have to set stop losses and profits, but close the deal when signals about a trend change appear. When setting a stop, focus on local highs/lows.
2. Strategy with a combination of “Morning Star” and “Evening Star”
These candlestick combinations occur when trends end. Note that the combinations may not be three-candlesticks. It is possible that between candles with a large body, there will be several candles with small bodies. Therefore, you should wait until the full combination is formed.
Trading Rules:
- entering the market at the level of the 1st candle after the formation of a combination;
- stop loss below the minimum of the formed “morning star” or the maximum of the “evening star”;
- Fix your profit yourself or at the take profit level “nearest maximum – 10\nearest minimum + 10 points”.
Conclusion
Knowledge of combinations of Japanese candlesticks significantly expands a trader’s ability to find reliable entry points into the market and conclude profitable transactions. At the same time, there is no need to study all the combinations; it is enough to include some of them in your own trading strategy in order to increase the reliability of the signals provided by other trading instruments.
It's time to talk about such an important part of graphical market analysis as Japanese candlesticks. We will look at their types and types, and also dive a little into the analysis of Japanese candlesticks.
What are Japanese candles
Where did this type of chart come from, and why are they called Japanese candlesticks?
Everything is very simple, we will find the answer in the pages of history. Japanese candlesticks originated in Japan (amazing, right?) thanks to the Japanese Rice Exchange, which operated since the 17th century. The Japanese, long before the advent of the classical version of technical analysis Charles Dow, used candlestick charts to analyze the rice market. In its classical form, the analysis of Japanese candlesticks, which we see now, were formed by the 1850s. The famous Steve Nison made a very big contribution to the analysis of Japanese candlesticks. It was he who introduced Japanese candlesticks to the Western world of trading, actively popularizing the analysis of Japanese candlesticks for trading on stock exchanges. The books that Steve Neeson wrote: “Japanese Candlesticks” and “Beyond Japanese Candlesticks” can be downloaded on our website here.
Now let's look at the appearance of the Japanese candlestick.
A Japanese candlestick consists of a “body” and “shadows” (less commonly “tail”, “wick”), and displays the opening and closing prices, as well as the high and low prices for a specific period (timeframe).
Classic bearish Japanese candlestick
In the picture we see a classic bearish Japanese candlestick
1. Maximum price (usually denoted by the Latin letter “H”, from the English Height / High - height\high). Located at the highest point of the candle's shadow. Displays the maximum price movement for a specific period.
2. Opening price (Latin “O”, from the English Open - to open). A mark that fixes the price at the beginning of the opening period of the candle. It is the beginning of the “candle body”.
3. Closing price (Latin “C”, from the English Close - closing). A mark that fixes the price at the end of the candle's closing period. It is the end of the “candle body”.
4. Minimum price (Latin “L”, from the English Low - bottom). Located at the lowest point of the candle's shadow. Displays the minimum price movement for a specific period.
For a bullish candlestick, the “H” and “L” marks remain unchanged, while the “O” and “C” are swapped, respectively (“O” below, “C” above).
During market movement (that is, during the formation of a candle), a Japanese candlestick can change its status from bearish to bullish several times, especially during strong market fluctuations.
If the closing price (“C”) is higher than the opening price (“O”), then this candle is called bullish, that is, growing. On the graphs it is displayed either hollow, white, or traditionally cold colors (green, blue, and so on).
If the closing price (“C”) is lower than the opening price (“O”), then the candle is called bearish, and therefore falling. On the graphs it is always displayed in black, or, traditionally, in “hot” colors (red, orange, yellow).
Most traders prefer charts with Japanese candlesticks, as they are easy to understand and easy to read. Looking at Japanese candlesticks, you can see a more complete and clear picture of the movement of the price chart.
As we can see from the examples, Japanese candles come in different sizes. What is this connected with? Let's figure it out.
The longer the candle, the stronger the price increase in a given period. If the body of the candle is long, this means that there is strong selling or buying pressure. If the body of the candle is short, then this indicates strong price consolidation and small growth.
Thus, bullish Japanese candles (displayed in green in ours) signal greater pressure from buyers of the asset. The longer such a candle is, the more the price rises. But although such candles suggest growth, you should always monitor their position on the chart. If, for example, a long bullish candle appears after a long price decline, this could signal a potential trend reversal (especially if the candle appeared at a support level). Too much buying pressure can initiate an intense bullish trend.
Bearish Japanese readings (ours are orange) signal greater selling pressure. The principle of their action is the opposite of bullish candles. After a long period of growth, a long bearish candle may mean that the trend may soon reverse and indicate a resistance level. After a prolonged price decline, a long bearish candle may indicate an even greater failure, and even panic in the market.
It is not uncommon to see this type of Japanese candlestick on a chart, such as “ Marubozu brothers" These are both bearish and bullish candles that do not have “shadows”, but only a body. These are very powerful candles, which signal that this segment was dominated exclusively by sellers or buyers, respectively.
Japanese candles "Marubozu Brothers"
Candle shadows
“What would your good do if evil did not exist, and what would the earth look like if shadows disappeared from it?” - Woland said in Bulgakov’s immortal novel.
On almost all candles, you can notice lines above and below the body of the Japanese candle. These shadows can provide very valuable information to someone watching the market. The shadows of a candle are the range in which the price moved between the opening and closing of the candle. In other words, the shadows of the Japanese candlestick reflect the struggle between buyers and sellers, and the closing price reflects what they agreed on in a specific period of time.
If you observe a candle that has a long upper shadow and a short lower one, it means that buyers were trying to dominate during this period by offering a higher price for the asset. But the sellers seized the initiative and “brought down” the price to the one you see at closing.
If you see a short upper shadow and a long upper shadow, then this illustrates the opposite situation. Sellers initially dominated here, but they gave in under pressure from buyers. It is precisely such market situations that draw long shadows.
If the chart shows you a candle with long shadows and a small body, then know: such candles are called “Spinning Top”. They symbolize indecision in the market. Large shadows indicate that both buyers and sellers fought for a long time over the price, but did not come to anything. Such a Spinning Top after a long rise, or a long bullish candle, means that buyers are weakening and will soon give up. A spinning top after a long fall may mean weakening sellers and an imminent trend reversal.
Now let's move on to a whole section of very significant Japanese candlesticks - doji.
Doji are extremely important and indicative neutral candles that can give a very important signal, either by themselves or when present in various combinations. They occur when the opening and closing prices are approximately the same, so you see either a Catholic cross, an inverted cross, or a plus on the chart.
An ideal doji involves opening and closing prices at the same level, but this is not always the case. Often the price closes just a few pips above or below the opening price, and this is also considered a doji. Like Spinning Top, doji signal indecision in the market and maintenance of the status quo. According to Steven Neeson, who pays great attention to these candles, dojis located in a cluster of other candles with small bodies are not considered important. At the same time, if you see a doji among long candles, then this is a reason to think about an impending change.
Now let's talk about the main varieties of doji.
There are 3 main varieties of doji: long-legged doji, dragonfly and tombstone (yes, does not sound very positive). Now about each separately.
Long-legged doji has shadows of approximately equal length. Such dojis most reflect indecision in the market. The long-legged ones show that there was a heated struggle during the bidding, but no one emerged victorious, and everything remained in its place.
Doji the dragonfly appears in the following market situation: during the opening of the candle, sellers dominated, but in the end, buyers made up for the position and returned the price to its original value. A dragonfly doji candlestick looks like the letter “T”, with a long shadow at the bottom of the body and no shadow at the top (or very short).
The role of the dragonfly doji in a trend reversal depends on the price movement before it, as well as the future movement. A long shadow below signals that buyers are beginning to dominate, but that there are still a fair number of sellers in the market. If a dragonfly doji occurs at the bottom of a long bearish trend, and ideally at a support level, then this can give a signal for a trend reversal. If a dragonfly occurs at the top of a bullish trend, then there is also room to expect a reversal in the price chart. But it is worth remembering that for both options you must wait for confirmation.
Tombstone Doji- the last of the standard types of Doji candles. The candlestick resembles an inverted "T", that is, a long upper shadow, and the body is below, given that the opening and closing prices are the same (or almost the same). Such a candle tells us that buyers have significantly dominated, pushing prices higher. But by the end of the session, sellers were still able to drive the price down to the opening price of the transaction. As with the Dragonfly Doji, the Tombstone Doji works on the same principle and is most often a reversal signal.
We're done with doji. Now let's talk about some more significant types of Japanese candlesticks.
Japanese hammer and hangman type candles
Japanese candlesticks: hangman and hammer.
Hammer is a rising Japanese candle (bullish), if it emerges after a long bearish trend, we should expect a price reversal upward. The hammer has a small body and a long lower shadow. It doesn't matter what color the candle is, what matters is the formation itself.
Gallows is a falling Japanese candlestick, which, after a strong bullish trend, can signal a downward fall in price. Like the hammer, it has a small body and a long lower shadow.
Candlestick patterns (combinations)
There are also a large number of combinations (patterns) of candles, which can also be significant in technical analysis.
So, for example, there is such a combination of candles as “ Star" Consider the “Evening Star” and the “Morning Star” and many others. Let's look at the main ones.
"Evening Star"
"Morning Star"
Candles that open with gap(separation) from the previous candle are called “Stars”. Usually, the previous candle has a large body, and the one that “hangs in the air”, as a rule, has a small body. The role of “Star” can also include tops, hammers and doges of any type, which enhances the meaning of the formation.
Evening Star is a falling pattern that can indicate a resistance level. The combination may signal a trend reversal, especially if the subsequent candle is long bearish.
morning Star is a growing figure, and the complete opposite of the “evening” one.
Doji Star, presented in the figure below, implies a combination of candles in which, after a rapidly growing candle, a doji candle opens with a gap. As we already know, a star entails a reversal, and a doji candle illustrates indecision in the market. Most often, doji stars lead to a trend reversal, but after a certain period of indecision. Before making a trading decision, you should wait for confirmations, as suggested in the morning and evening stars examples.
Doji Star
The following combination of Japanese candlesticks is called “ dark cloud" If after a rising candle a sharp falling candle appears, whose closing level is below the middle of the growing candle, then such a figure may signal a trend reversal.
Dark Cloud Candlestick Pattern
The opposite combination of candles is “ Breakdown" If after a downtrend, especially after a long bearish candle, a long bullish candle appears that opened below the closing price and closed above the middle of the previous candle, then this is a breakout. This candlestick pattern usually signals a price reversal towards a bullish trend.
Breakout candlestick pattern
If, after a long rising trend, a small rising candle is completely covered by a bearish candle, then this combination may symbolize a reversal. Such candles are called - Falling embracing candles.
Falling enveloping candle
The last Japanese candlestick figure for today is “ Harami", which translates from Japanese as "pregnant".
Figure "Harami"
A Japanese candlestick that appears within the body of the previous one is called “Harami”. This combination indicates a decline in the trend potential. The shadows of the second candle do not necessarily have to be within the larger candle, but it is preferable when they do not come out.
For novice traders, in the initial stages, it is very difficult to notice and apply candlestick figures and candlestick patterns in a timely manner. It takes significant time spent viewing and analyzing charts for the trader’s eyes to get used to and see the full picture of what is happening. To make this process faster, we recommend installing a special CandleStick indicator or Japan indicator on your terminal, which will highlight significant candles and combinations of candles on your chart. This indicator will be useful not only for beginners, but will also make life easier for more experienced traders. On our website you can find many useful indicators, scripts and even trading robots, which are available for download absolutely free.
In conclusion, we note that Japanese candlesticks are an excellent illustration of the price chart on the market, and are rightfully popular with traders of all levels. In addition to simply demonstrating a trend, Japanese candlesticks can themselves be signals that a trader can successfully use to make his trading decisions.
